Forty-fourth Report of Session 2019–21 Contents

3The EU Digital Services and Digital Markets Acts27

These EU documents are politically important because:

  • they aim to establish harmonised, EU-wide regulatory standards for both the removal of illegal content online and the curbing of the market power of the largest “Big Tech” companies that dominate the global digital economy. The EU’s actions may present both risks and opportunities for the UK’s own approach to regulating such matters via the upcoming Online Safety Bill and Digital Markets Unit.

Action

  • Write to the Minister for Digital and Culture (Caroline Dinenage MP) to seek further information on the Government’s approach to engagement with the EU on regulation of the digital economy.
  • Draw these proposals to the attention of the Home Affairs Committee, the Digital, Culture, Media and Sport Committee, the Business, Energy and Industrial Strategy Committee, the Science and Technology Committee and the Treasury Committee.

Overview

3.1Given the growing importance of the digital sphere for both economic and social purposes, the European Commission in December 2020 published two important legislative proposals to set EU-wide regulatory standards for companies operating in that sector.

3.2The first of these, called the Digital Services Act (DSA), would create new content moderation requirements for internet hosting services and platforms, primarily to ensure that illegal content—such as child sex abuse materials or the sale of counterfeit goods—is taken down expeditiously. It covers similar ground to the Government’s upcoming Online Safety Bill. The second proposal, for a Digital Markets Act (DMA), is meant to address the market failures arising from the enormous power wielded by certain large online platforms—like Amazon and Facebook—in connecting businesses to consumers and in shaping public discourse. The Commission has proposed to do so by designating the largest digital companies as “gatekeepers”, who would be subject to expansive new regulatory requirements relating, for example, to how they deal with their business users and consumers (including a blacklist of banned unfair practices). The DMA’s objectives are broadly similar to those of the Government’s planned Digital Markets Unit, which will oversee the enforcement of a new UK competition regime for large online platforms.

3.3The Commission’s proposals are for draft legislation: they must still be agreed jointly by the 27 EU Member States in the Council of Ministers and by the European Parliament before they become EU law. Given the scope, complexity and impact of the proposals, these legislative deliberations are likely to take well over a year (although the Commission has expressed the hope the new rules could take effect by 2023). Companies in the affected sectors, not least giants like Google, Amazon and Apple, are also expected to continue lobbying EU decision-makers heavily as those negotiations continue, given the size of the market that would be regulated differently if the proposals become law.

3.4The DSA and DMA, as and when they become EU law, will not be directly applicable in the UK as it has now left the European Union and Single Market. However, they may still have implications for UK businesses with operations in the relevant sectors within the EU, and the EU’s chosen approach could also influence the direction of international standards for the digital economy that the Government recently identified as a key objective of its “regulatory diplomacy”. Both Ofcom and the Competition and Markets Authority have identified a coherent approach between the UK and EU with respect to oversight of the digital sector as important to ensure effectiveness and avoid regulatory arbitrage. However, the extent to which the Government itself is seeking to engage with EU policy-makers as they shape their Digital Services and Markets Acts is unclear.

3.5In light of this, we have considered the DSA and DMA proposals in more detail below, including their possible implications for the UK.

EU regulation of the digital economy

3.6The use and reach of digital services have expanded rapidly over the last two decades. The internet now offers the opportunity to access a vast range of goods, services and content digitally. However, this growth has also raised a number of concerns from a public policy perspective, for example around protection of consumer rights, freedom of expression and fair competition.

3.7Within the EU’s Single Market, the key legal framework for the provision of digital services is currently set out in the 2000 E-Commerce Directive. This legislation established rules on information to consumers relating to online purchases and on the service providers’ legal liability for hosting of illegal materials, as well as basic transparency measures related to online advertising. There is also a host of other European rules with a bearing on the digital economy agreed more recently in response to specific risks or issues, including notably in relation to data protection, copyright of online content, consumer rights for goods bought on the internet, streaming services for audiovisual content and Value Added Tax. Most recently, the EU agreed new rules on the removal of online content linked to terrorism, which we discuss separately in chapter six of this Report.

3.8However, policy-makers in the EU—like those elsewhere28—have not considered existing regulation to be sufficient given the rapid pace of development in the digital economy and online public spaces. In 2019, the new President of the European Commission, Ursula von der Leyen, identified making the EU “fit for the digital age” as one of her key political priorities.29 More specifically, the Commission has warned that internet users are “exposed to increasing […] harms online” in areas like online safety, the shaping of public opinion and discourse, and the sale of dangerous or counterfeit goods. In addition, the Commission is concerned by the dominant position of companies like Amazon, Apple, Google and Facebook within the European—and global—digital services economy, which it says permits them to pursue unfair business practices and creates market failures, putting at risk good outcomes for EU consumers “in terms of prices, quality, choice, and innovation”.

3.9The Commission launched a public consultation in June 2020 on both aspects of the regulatory gaps it had identified, and formally tabled two draft Regulations—referred to as the Digital Services Act and Digital Markets Act respectively—on 15 December 2020. The first relates to the monitoring and removal of harmful online content, whereas the second aims to address unfair business practices of “Big Tech” companies in the market for digital services. The Commission proposals are not yet law: they still require the approval—with amendments if necessary—of the European Parliament and of a Qualified Majority of EU Member States in the Council of Ministers.

3.10We have considered the substance of the two draft Acts an in more detail below, followed by an assessment of their potential implications for the UK’s own regulatory approach to digital services and for British businesses and consumers.

The proposal for an EU Digital Services Act

3.11The proposed Digital Services Act would create new EU-wide rules on how online platforms like YouTube, eBay and Tiktok must monitor and, where appropriate, remove illegal or harmful content uploaded and disseminated via their services.

3.12The DSA would update and supplement the EU’s current regulatory regime for the provision of digital services as set out in the 2000 E-Commerce Directive. Of particular relevance is that, under that legislation, digital services providers are exempt from any legal liability for hosting or transmitting illegal content where they act only as an “intermediary”.30 As interpreted by the EU Court of Justice, this “safe harbour” exemption is available only where the intermediary “does not have actual knowledge of illegal activity or information and […] is not aware of facts or circumstances from which the illegal activity or information is apparent”. The Court’s case-law has, in particular, drawn a distinction here between “passive” and “active” hosting services, where only the former exempts them from liability. By contrast, “active” hosting—which occurs, for example, where eBay promotes counterfeit goods offered for sale by a third party—can give rise to liability on the part of the hosting service and thus exposes them to the risk of (financial) penalties.31

3.13However, determining in practice whether a digital intermediary has liability for content they host or transmit is notoriously difficult, not least because different EU Member States continue to interpret the liability rules differently.32 More generally, a recent Commission evaluation found the current EU regulatory regime for digital services was not sufficient to address the “serious societal and economic risks” arising from online access to illegal or dangerous goods,33 services34 or content,35 such as counterfeit goods, terrorist propaganda, or Covid-19-related misinformation. Noting that large online platforms in particular have become “de facto public spaces” that play a “systemic role for millions of citizens and businesses”, the Commission concluded that EU rules do not ensure adequate “accountability for the content which these providers distribute on their platforms”. The divergence in national approaches to regulation of platforms taken by individual Member States in recent years has also complicated the overall legal picture within the EU’s Single Market, favouring larger companies with the ability to ensure compliance across jurisdictions.

3.14In practice, this situation has meant that digital services providers can take different approaches to moderating the same content in different Member States of the EU.36 Overall, illegal goods and content have continued to proliferate: the Commission evaluation notes for example that imports of counterfeit goods into the EU are estimated to have amounted to €121 billion in 2016 alone, primarily bought by individual consumers online, while reports of child sex abuse materials available online have also increased significantly in recent years. The Commission therefore concluded that a revision of EU law in this field is necessary to counter illegal activities online and protect internet users. It also noted that countering legal fragmentation would be economically beneficial more widely, by removing a barrier to the “scaling up” by smaller companies and allowing them to compete with their large, incumbent competitors more effectively (an issue explored further in paragraphs 19 to 26 below on the Digital Markets Act).

3.15To revise the EU’s approach to the regulation of online content, the EU Digital Services Act (DSA) aims to “set out uniform rules for a safe, predictable and trusted online environment”. Ultimately, the Act’s objective is to define “clear responsibilities and accountability for providers of intermediary services, and in particular online platforms, such as social media and marketplaces” to ensure that illegal content37 is removed or rendered inaccessible. To achieve this, it would establish EU-wide legal obligations for digital services providers to act against the dissemination of illegal content while protecting “freedom of expression and [access to] information”. The precise range of those obligations would vary depending on the intermediary involved, but the scope of the Act would extend to internet service providers and hosting services, including online platforms like eBay or Amazon and app stores.

3.16The Commission proposal includes the following requirements:38

3.17Complementing the content moderation measures, the proposed DSA also contains exemptions for intermediaries from legal liability—and therefore from financial penalties—for illegal content which they host or transmit. The proposal broadly speaking maintains the liability rules as already contained in the 2000 e-Commerce Directive as described in paragraph 12 above.45 While making some clarifications around the applicability of the exemption,46 the Commission proposal would not extend it to “active” hosting services as set out in the case-law of the Court of Justice. As a result, the precise interaction between the new content moderation requirements—which aim to incentivise intermediaries to actively monitor content uploaded to their systems for illegal activity, for example on the basis of “notice and action” reports—and the liability exemption is not clear from the text of the Regulation, and a lack of legal clarity could persist in this area.47

3.18The draft Act stipulates that penalties for digital services providers that breach the proposed new content moderation requirements must be “effective, proportionate and dissuasive”, with any fines to be generally capped at 6% of the company’s global turnover.48 Given the cross-border nature of the digital services economy, and the dominance of American companies in this market in particular (as discussed further below), the DSA would require non-EU digital services providers with operations within the European Union to appoint a legal representative in one of its Member States. These would have separate legal responsibility for the company’s compliance with the Regulation, in addition to the liability of the provider itself.

The proposal for a Digital Markets Act

3.19The second element of the Commission’s digital economy package would establish a EU Digital Markets Act (DMA). Its aim is to set EU-wide rules to reduce the market power wielded by certain large companies (primarily American companies like Amazon, Apple, Google and Facebook) within the EU’s digital economy.

3.20More specifically, by dominating the market for “core platform services” (such as search engines functionality, social networking and app stores), these companies “intermediate a significant portion of transactions between consumers and businesses”. As a result, the Commission describes these companies as “gatekeepers”: they often have control over the extent to which other businesses, such as retailers, can connect with actual and potential customers online, allowing them to act as private rule-makers and facing accusations of unfair practices for their own commercial benefit at the expense of businesses users that are reliant on them.49 Moreover, there is “weak contestability“: it is difficult for new platforms to chip away at the incumbents’ gatekeeper status, because of the higher barriers to market entry in the digital economy.50 This problem is exacerbated by the legal complexity around platform liability also identified as one of the drivers of the ineffective regulation of online content in the EU (see above).51

3.21Overall, the Commission says, these circumstances increase the likelihood that the market for digital services “do[es] not function well—or may soon fail to function well—and thus do not deliver the best outcome for consumers in terms of prices, quality, choice, and innovation”. Despite having launched various anti-trust procedures against “Big Tech” companies including Google in the past, which aim to prevent these companies from abusing their dominant position in a given market, the Commission has concluded that the “identified market failures” for these large providers of core platform services would, “absent regulatory intervention […] effectively remain un-addressed”, notably because existing EU competition rules “cannot conceptually deal with market failures resulting from the behaviour of gatekeepers”.52 While individual countries within the EU have begun to adopt national measures to “deal with [such] competition problems”, the Commission is concerned that this may be “insufficiently effective” because of the cross-border nature of the digital economy and increase legal complexity that impedes start-ups from “growing into challengers of established players in the digital sector”.53

3.22To put in place a solution to prevent what it describes as “longer-term societal losses in terms of higher prices and less product variety for consumers, and less dynamic innovation”, the Digital Markets Act would make large platforms formally identified as “gatekeepers” subject to a new set of regulatory requirements in respect of specific core platform services54 they offer, consisting of a list of mandatory features of these core services, and a blacklist of banned practices. These would be “ex-ante”, namely with an intended preventative effect, rather than only applying if issues at a specific company have been identified. Broadly speaking, these requirements either aim to reduce users’ dependence on gatekeeper platforms or increase the contestability of the markets in which they are powerful. For example, the Commission proposal seeks to:

3.23The Commission proposal divides the requirements for gatekeepers set out in the draft Digital Markets Act into two categories: “self-executing obligations” and “obligations that are susceptible to specification”. The former would apply without further as set out in the DMA, whereas for the latter the Commission could establish binding, company-specific measures specifying how they would need to be implemented in practice.56 The European Commission has described the proposed regulatory requirements for gatekeepers in the digital economy in more detail on its website.57

3.24Because these new obligations would apply only to “very large online platforms with a gatekeeping role” in the EU’s digital economy, the draft Regulation sets out how such companies would be identified. This process would be based on a company’s “impact on the [EU’s] internal market” as demonstrated by its turnover or capitalisation, the number of users in the EU for one of the “core platform services” listed in the Act, and whether this user base gives it an “entrenched and durable position”. If a platform meets certain qualitative thresholds for these three criteria, it would normally be designated a gatekeeper unless the company can provide “sufficiently substantiated arguments” that it is not.58 In addition, underlining the purpose of the draft legislation in preventing future market failures, the Commission would also be able to conduct a market investigation to designate a specific company as such even if it does not meet all the qualitative thresholds. However, such ‘potential’ gatekeepers would only be subject to a narrower range of the regulatory requirements described above.59

3.25Where designated gatekeepers breach their obligations under the Regulation, the Commission has proposed that it could fine the company in question an amount capped at 10% of its annual worldwide turnover. In addition, if it had found “systematic non-compliance” by a particular gatekeeper—described as three incidents of non-compliance in the last five years—the EU would have the ability to impose behavioural or structural remedies. These are concepts under EU competition law, where the Commission can already legally require companies to alter their conduct or divest certain parts of their business.60

3.26The precise interaction of the Digital Markets Act with EU anti-trust law, which can be used against companies that abuse their dominant position in a given market, is not clear. Similarly, the Digital Markets Acts does not cover the controversial issue of taxation of the digital economy, which is being discussed in an international setting within the Organisation for Economic Co-operation and Development (OECD) on the basis of proposals recently put forward by the new American administration.

The EU legislative process

3.27The European Commission’s proposals for both the Digital Services Act and the Digital Markets Act are draft versions of the legislation only: they are now being considered by the European Parliament and the EU’s Council of Ministers (where the 27 Member States are represented). These two institutions must jointly agree on the legal texts before the rules can become EU law and binding on the Member States and on digital services providers operating within them. This legislative process is unlikely to be straightforward, as there are already significant divergences between the Member States and within the Parliament on the way forward.

3.28A full examination of the range of issues likely to be discussed as the Parliament and Member States grapple with the proposals is beyond the scope of this Report chapter. However, they are likely to be wide-ranging. For example, with respect to the DSA, there have been debates about whether the scope for mandatory action by hosting services should also cover “misinformation” which is harmful but not illegal. Similarly, the need for the new competition tool to break up the dominance of ‘Big Tech’ in the form of the Digital Markets Act is controversial and all aspects of the Commission’s chosen approach remain up for debate.61 The legislative deliberations in Brussels are likely to touch on not only the manner of designating gatekeepers, but also the specific regulatory requirements to which they would be subject.62

3.29The proposed allocation of new supervisory powers to the European Commission within the digital economy under both proposals is also likely to be controversial with Member States who may wish to keep such powers for their national regulatory authorities.

3.30Given the proposals are aimed primarily at the operations of American companies in one of their most important overseas markets, there is also a clear strategic and geopolitical angle to the proposals. The US Government and the “Big Tech” companies themselves are expected to lobby both the European Parliament and Member States heavily to influence the substance of the legislation, since they would shape the regulatory environment in what is one of the world’s largest markets.63 This lobbying effort has been underway since long before the formal proposals and is likely to continue in the coming years.64

3.31In light of the above, the legislative deliberations on both the Digital Services and Digital Markets Acts are unlikely to be speedy. Both the Member States and the European Parliament, as well as external interested parties, will seek substantial changes during the law-making process, and the timetable for formal approval of the legislation—and consequently when it may take effect—is not yet clear. The Commission has expressed the hope that the new rules could take effect from 2023, but at present that seems optimistic. Given the complexity, reach and scope of the draft legislation, the legislative process in Brussels is likely to take well over a year.

Implications of the EU Digital Services and Market Acts for the UK

3.32The EU DMA and DSA proposals, as and when they are agreed, will not apply directly to and in the UK, given that EU law ceased to apply at the end of the post-Brexit transition period on 1 January 2021.65 The new UK/EU Trade & Cooperation Agreement (TCA) also does not require the UK to remain aligned with EU rules in this sector or otherwise substantively constrain either side’s regulatory approach, although the Agreement does provide for a “Specialised Committee on Services, Investment and Digital Trade”, where the Government and the EU could discuss policy developments in this sector.66

3.33However, we consider that the UK, even as a non-EU Member State, has a clear economic and political interest in both the EU Digital Services and Markets Acts. The two European Commission proposals each overlap with similar policy developments in the UK: the Government has announced that it intends to legislate for a “Digital Markets Unit” within the Competition and Markets Authority (CMA) that would “oversee a new regulatory regime for the most powerful digital firms”, covering the same ground as the DMA. Similarly, it is preparing an Online Safety Bill which, like the Digital Services Act, will aim to “tackle illegal activity taking place online”. For a number of reasons, it seems prudent for the Government to take a close interest in the development of the EU’s proposals.

3.34First, as and when the Digital Services and Markets Acts become EU legislation and take effect, they will apply to any UK digital services providers with operations in the EU. Indeed, the Commission’s digital economy proposals are explicitly intended to apply also to non-EU companies with operations within the European Union.67 It is difficult to put an exact figure on the value of the export of such services from the UK into the EU, not least because of the substantial change in the trading environment that occurred when the UK left the EU’s Single Market on 31 December 2020, but figures from the Department for Digital, Culture, Media and Sport suggest that the UK exported £51.9 billion worth of digital services in 2019, 40% of which was to the EU. The potential economic implications of more stringent regulation of digital services exported to the EU by UK businesses are therefore significant.

3.35Secondly, voluntary cooperation on a coherent regulatory approach is likely to be mutually beneficial. There are potential downsides to significant areas of divergence between the UK and EU as independent, significant markets for digital services. Where companies in the digital sector have operations in both the UK and the EU, divergent legislative approaches between the two could face additional compliance costs, legal complexity and—potentially—conflicting regulatory requirements that could hinder cross-border trade flows. Conversely, as the Government itself has emphasised, different regulatory practices could offer companies in the digital sector opportunities to “switch between different jurisdictions at low cost while retaining a global customer base”. Cooperation may also be more effective in countering any US opposition to legislation that affects the interests of some of America’s largest companies. As there could be significant differences between the EU’s proposals and the UK approach, on which the Government may wish to engage with the EU to minimise the negative effects described above.68

3.36Thirdly, the way the EU proceeds to legislate in terms of both online content moderation and the competitiveness of the digital economy could have important implications for international regulatory cooperation and, by extension, the UK’s own policy in this area. The EU as a Single Market is the world’s largest economy, which means any harmonised regulatory approach—as set out in the Digital Services and Markets Acts—is likely to have a significant impact on the targeted companies within the digital sector. The EU may pursue formal standard-setting that conforms to its chosen regulatory approach within international bodies like the World Trade Organization and the OECD.69 There may also be a less formal “Brussels effect”, where companies voluntary adopt EU regulatory requirements for their global operations to streamline their internal processes across jurisdictions and consequently lobby other countries, for example the UK, to adopt similar rules.70 To what extent such an effect will occur in relation to the Digital Services Act and Digital Markets Act is, of course, unclear at this stage.

3.37All these issues make it clear there the UK has an interest in seeking to influence the final shape of the EU’s Digital Services and Market Acts.71 It is therefore to be welcomed that the Government itself recognises the need for international cooperation in the area of digital regulation. In a 2019 policy paper, Ministers emphasised the need for “co-ordination between administrations” in order to “ensure the effectiveness of regulation” in the digital economy. Similarly, the government’s recent Integrated Review of security, defence, development and foreign policy wants to place the UK “at the forefront of global regulation on technology, cyber, digital and data” through “regulatory diplomacy to influence the rules, norms and standards governing technology and the digital economy”. The Department for Business, Energy and Industrial Strategy is also currently preparing a “ whole-of-government international regulatory cooperation strategy”.

3.38As such, the logic of the Government’s position on digital regulation would seem to require it to engage with the EU as it deliberates its Digital Services and Markets Acts so that the EU and UK, to the extent possible, pursue the same objectives in a coherent manner. Indeed, both Ofcom72 and the CMA73 have already emphasised the value of coordinated regulatory action and supervision of the digital sector, post-Brexit, directly to the European Commission. In particular, despite the likely differences between the UK and EU will choose to regulate different elements of the digital sector, the CMA has argued for a “coherent approach across jurisdictions” to avoid “Big Tech” shifting between countries for regulatory reasons.

3.39However, the Government itself does not yet appear to have a coherent cross-departmental approach to engagement with the EU on the DSA and DMA proposals. For example, in an Explanatory Memorandum submitted by DCMS on the EU Digital Services Act, the Minister for Digital and Culture (Caroline Dinenage MP) explicitly states that the Government “will look to engage with the EU as these proposals develop to understand any implications for UK businesses”. Similarly, the Home Office has told us that the DSA has been the subject of discussions with the EU in light of the Government’s own work on an Online Safety Bill (as explored in more detail in chapter six of this Report ). However, in the Government’s separate Memorandum on the Digital Markets Act, that commitment to engagement is absent.74 Similarly, by its own admission, the Government did not respond to the Commission’s consultation on its digital economy package in the summer of 2020 “as it occurred during the transition period”. The relevance of the post-Brexit transition period is not immediately clear, given the EU’s regulatory approach in this area is of continued interest to the UK even beyond Brexit (as demonstrated not least by the Government’s own focus on “regulatory diplomacy” for the digital sector, but also by the fact Ofcom and the CMA did engage with the EU consultation).

Conclusions and action

3.40While the EU’s Digital Services and Markets Acts will not apply in the UK directly as a matter of law, we consider that their substance may have an impact on both UK businesses and the Government’s own regulatory approach.

3.41However, while Ministers have emphasised the value of international regulatory cooperation and diplomacy, especially when it comes to the cross-border digital economy, the Explanatory Memoranda submitted by the Department for Digital, Culture, Media and Sport do not place these significant EU proposals in the context of the Government’s professed approach. We also find it puzzling that the Government, having recently insisted on the value of regulatory diplomacy for the digital sector in particular, failed to make representations to the European Commission during its public consultation in 2020 when Ofcom and the Competition & Markets Authority did see the value in doing so (and the Government is now engaging with the EU, at least in respect of the synergies between the Digital Services Act and the Online Safety Bill).

3.42In light of this, we have written to the Minister for Digital and Culture to ask her to set out the Government’s plans for engagement with the EU on these proposals, and whether it has identified any risks arising from the EU proposals to the UK’s own approach to the regulation of the digital sector. More generally, we consider that is in Parliament’s interest to monitor the legislative deliberations in Brussels on the Digital Services and Markets Acts—and their potential impact on similar policy developments in the UK—closely. In anticipation of the Minister’s reply to our questions, we draw these developments to the attention of the Business, Energy and Industrial Strategy Committee, the Digital, Culture, Media and Sport Committee, the Home Affairs Committee, the Science and Technology Committee and the Treasury Committee.

Letter from the Chair to the Minister for Digital and Culture (Caroline Dinenage MP)

Thank you for your Explanatory Memoranda of 14 January 2021 on the European Commission’s recent proposals for an EU Digital Services Act and Digital Markets Act,75 which overlap to a large extent with the Government’s own work on the Online Safety Bill and the Digital Markets Unit with respect to illegal online content and the market power exercised by the largest digital companies respectively.

We note that, with respect to the Digital Services Act, your Memorandum recognised the value of engagement with the EU to “build consensus around shared approaches to tackling online harms”. However, in relation to the Digital Markets Act you did not articulate such a commitment, although the Competition and Markets Authority has stated that it would be “desirable for there to be a coherent approach” between the UK and EU on “gatekeeper platforms” to avoid regulatory arbitrage and strengthen the effectiveness of new competition rules.76 The Government itself has also identified influencing the standards governing technology and the digital economy through “regulatory diplomacy” as a key UK objective in the recent Integrated Review. The EU could have a significant impact on such standards in international fora, and its position is likely to develop in tandem with its Digital Services and Markets Acts.

We consider that it would therefore be prudent for the Government to monitor the development of the two Commission proposals in the Brussels legislative process closely and, where appropriate, engage with the EU where convergence of the UK/EU approach may be desirable or, conversely, divergence could pose risks to the effectiveness to the regulatory regimes foreseen under the Online Harms Bill and Digital Markets Unit.

In light of this, we would be grateful if you could write to us to set out how the Commission’s proposals for the EU’s Digital Services and Markets Acts fit into the Government’s approach to regulatory diplomacy for the digital sector as outlined in the Integrated Review. We are particularly interested in any risks the Government has identified should the UK and EU approach divergence in substance, such as regulatory arbitrage; the opportunities for voluntary cooperation to mutually reinforce the effectiveness of the UK and EU’s independent legal approach to the areas covered by the above proposals; and in which areas these risks and opportunities are most prominent.

We would be content to receive your reply by the end of May.

27 (a) Proposal for a Regulation on a Single Market For Digital Services (Digital Services Act) and amending Directive 2000/31/EC; COM(20) 825; Legal base: Article 114 TFEU; ordinary legislative procedure; QMV; Department: Digital, Culture, Media and Sport; Devolved Administrations: Not consulted; ESC number: 41744.
(b) Proposal for a Regulation on contestable and fair markets in the digital sector (Digital Markets Act); COM(20) 842; Legal base: Article 114 TFEU; ordinary legislative procedure; QMV; Department: Digital, Culture, Media and Sport and Business, Energy and Industrial Strategy; Devolved Administrations: not consulted; ESC number: 41745.

28 Regulation of digital services has been discussed at the United Nations, the Council of Europe, the WTO, and OECD, and is regularly on the agenda of G7/G20 meetings. In the UK, explored further elsewhere in this chapter, the Government is preparing an Online Safety Bill to regulate online content, and is separately also seeking to establish a statutory Digital Markets Unit within the Competition and Markets Authority.

29 One of the specific proposals envisaged in von der Leyen’s political ‘mission statement’ in late 2019 was “a new Digital Services Act” to “upgrade [EU] liability and safety rules for digital platforms, services and products” with the aim of protecting both individual consumers and business users. In February 2020, fleshing out its preferred approach to updated regulation of online platforms in a policy paper, the Commission also referred to the possibility of regulatory intervention to “ensure that markets characterised by large platforms” remain “fair” and contestable for innovators, businesses, and new market entrants”. By May that year, it had committed to tabling draft EU legislation on such competition rules for large digital platforms by the end of 2020.

30 This applies where the company provides “mere conduit”, “caching” or “hosting” services, where information is transmitted or stored automatically.

31 Where online platforms are liable jointly for harmful or illegal content alongside the entity from which such content originated, digital services providers can face significant financial penalties.

32 In particular, the notion of a “passive and neutral role” for hosting services under the E-Commerce Directive is interpreted differently by different EU countries, despite extensive caselaw by the EU Court of Justice on this matter. The Commission also notes that the incentive created by the Directive for online platforms to intervene to take down (potentially) illegal content could also mean they are taking an “active role” in the content they host, meaning they would no longer qualify for the exemption from liability.

33 Such as the sale of unlicensed pharmaceutical products or counterfeit goods. According to the European Commission’s impact assessment, annual imports into the EU of counterfeit goods alone were estimated to be worth €121bn (£104bn) in 2016.

34 These may include, for example, platforms offering rental services that do not comply with applicable housing legislation.

35 Such content includes, notably, child sexual abuse material, terrorist content, hate speech and ‘pirated’ audiovisual material that infringes intellectual property rights.

36 A European Commission impact assessment notes, for example, that the current interpretation of the liability regime under the E-Commerce Directive means that “the very large online platforms generally have in place a system for notifying content, goods or services they intermediate, but the actions triggered are not always consistent”, whereas “small, emerging service providers” adopt “a risk-avoidance behaviour […] [which] decreases the quality of their service”.

37 The proposed definition of what constitutes “illegal content” is very wide, referring to “any information, including the sale of products or provision of services” which is “not in compliance with [EU] law or the law of [any] Member State”. However, the DSA itself would not harmonise what is deemed ‘illegal’ in this context. It would also not override existing provisions of EU law that require digital services providers to take specific action in relation to illegal content relating, for example, to terrorism or copyright infringement. The Regulation would, however, override any incompatible existing legislation at Member State level dealing with the same subject matter, such as “notice and action” procedures for the removal of unlawful content.

38 According to recital 14 of the draft legislation, the DSA would not apply to emails or private messaging services.

39 The draft Act also provides that public authorities of the 27 EU Member States would be empowered to serve digital services providers with an order to act against a “specific item” of content which is illegal under EU or national law, requiring it to be removed or access to it be disabled (Article 8). It appears that such action would only affect those accessing the service from the country that requested the removal under its national law, unless the content was illegal under EU-wide rules. Authorities could also request information from providers, including for example identifying information about anonymous service users (Article 9).

40 If the digital services provider takes action to remove content flagged as illegal, this must be communicated in a “statement of reasons” to the user who uploaded the content.

41 More specifically, the proposal would not oblige digital services providers to take action against content which is harmful but not illegal, but they would be required to publish terms and conditions which set out how they intend to deal with such content and publish annual reports on content removal. Online platforms would also be required to maintain an internal complaint-handling system in relation to how they handle content that is either illegal or incompatible with their own terms and conditions (Article 17), which must ultimately subject to out-of-court dispute settlement (Article 18).

42 Article 24 DSA. Very large online platforms, as defined in the Regulation, would have to make information on ads they display publicly accessible in a repository for a year after it was last displayed.

43 In the draft Digital Services Act, VLOPs are defined as those platforms which have 45 million more active users in the EU.

44 VLOPs would also have to publish terms and conditions for any “recommender” systems they operate; they would be subject to more extensive annual reporting obligations, for example with respect to the risk assessments carried out to establish the role they play in dissemination of illegal content; and be under an obligation to share data with public authorities in the EU where “necessary to monitor and assess compliance with this Regulation”.

45 In other words, intermediaries would remain exempt from liability if they do “not have actual knowledge of illegal activity or information” and are “not aware of facts or circumstances from which the illegal activity or information is apparent”

46 For example, the Commission has proposed to codify that any own-initiative investigations undertaken by digital services providers into potential illegal content do not necessarily “lead to the unavailability of the exemptions from liability”, but recital 22 of the DSA does state that “The provider can obtain […] actual knowledge or awareness” that triggers liability “through, in particular, its own-initiative investigations”. Similarly, if a hosting services provider is alerted to potential illegal content by a third party under the new statutory “notice and action” mechanism, the DSA states that this can in certain cases “be considered to give rise to actual knowledge or awareness” and therefore remove any exemption from liability in relation to that specific piece of content (Article 14(3) DSA).

47 Joan Barata, of the Cyber Policy Centre at Stanford University in the US, has referred to the proposal as “reproduc[ing] a central confusion” already contained in the E-Commerce Directive, namely the fact that “a lack of knowledge or awareness of illegality remains a precondition to enjoy liability exemptions, [while] the DSA encourages platforms proactive investigation of hosted content, which might trigger aforementioned knowledge or awareness” (and therefore liability and a risk of penalties). Continued lack of clarity over whether they are exempt from liability or not could lead to platforms either reducing their content moderation activities to limit potential liability or, conversely, act over-zealously in their application of content moderation rules, removing content that is not in fact illegal. While a full legal analysis of the Commission proposal is beyond the scope of this Report chapter, it does appear the EU Digital Services Act as drafted will not address this existing ‘grey area’ in European law, and it is likely to be a particular point of contention in the legislative negotiations in Brussels.

48 Responsibility for enforcement of the DSA would lie primarily with the relevant authorities of the 27 Member States, although the Commission has proposed to give itself direct supervisory powers for the largest online platforms operating in the EU in some cases.

49 As specific examples of such unfair practices, the Commission cites ‘locking in’ businesses and consumer use of their services by making the cost of switching to another platform prohibitively high, or by using commercially confidential data generated by the sales of their business customers to compete with them by offering similar goods or services (a common complaint against Amazon).

50 Among the barriers to entry listed by the Commission in its impact assessment for the Digital Markets Act are “extreme economies of scale and scope, high start-up costs, high fixed operating costs, high degree of vertical integration, single-homing, switching costs, multi-sidedness, network effects, zero-pricing markets, information asymmetry, data dependency, access to data, and behavioural bias are important or very important sources for market failures in digital markets”. For example, many “Big Tech” companies like Google offer their services at zero cost to final users—instead monetising their services through advertising, reducing opportunities for new competitors to gain a foothold with aggressive pricing practices.

51 For new online platforms, the potential liability risks and costs of compliance across national jurisdictions in the EU may be prohibitive whereas well-established platforms have the means to operate across several jurisdictions more easily.

52 In particular, Article 102 TFEU prohibits firms that hold a dominant position on a given market to abuse that position, for example by charging unfair prices, by limiting production, or by refusing to innovate to the prejudice of consumers .However, its application to online “gatekeepers” is difficult because such a company “may not necessarily be a dominant player” in a strict legal sense, and its practices may not be captured by EU competition law “if there is no demonstrable effect on competition within clearly defined relevant markets”.

“While certain forms of unfair business practices can be abusive under Article 102(a) TFEU, finding such an abuse not only requires a dominant undertaking but generally also an effect on competition. If an undertaking imposes on its trading partners or obtains from them terms and conditions that are unjustified, disproportionate or without consideration but without affecting competition on the market, competition law generally does not apply (See recital 9 of Regulation (EC) No 1/2003. Some national competition laws also prohibit the abuse of economic dependence). Such behaviour resulting from

53 The EU has already sought to address some of these issues through its so-called Platform-to-Business (“P2B”) Regulation, which took effect in July 2020. This introduced new legal obligations for online platforms and search engines that connect businesses with consumers, for example by imposing certain transparency requirements for and restrictions on the terms and conditions applied to the services they offer to their business users. However, the Commission says the P2B Regulation is a “general safety net” that applies to more than 10,000 platforms and “does not address issues deriving from the concentration of economic power and unfair business practices of a limited number of very large gatekeeper platforms”.

54 The DMA as proposed identifies the following as “core platform services”: online intermediation services like digital market places or app stores; search engines; social networking services; video-sharing platform services; number independent interpersonal communication services like WhatsApp; operating systems like iOS or Android; cloud computing services; and advertising services provided by a provider of any of the other core platform services. In addition, the Commission would have the power to undertake market investigations to identify future services to be added to that list. However, expanding the scope of the DMA to new services would require a formal legislative proposal to that effect.

55 Similarly, gatekeepers would have to allow the installation of third-party apps on their devices, and permit such software of third parties to properly function and interoperate with their own services.

56 The proposal for a Regulation does not contain much detail about how the Commission would intend to use this power in practice.

57 Under its proposal, the Commission could expand the list of requirements in the future by means of Delegated Acts, a type of EU statutory instrument (Article 10 DMA).

58 Under the DMA as proposed, the qualitative thresholds for designation as a gatekeeper would be an annual turnover within the EEA exceeding €6.5 billion or market capitalisation above €65 billion, and having 45 million monthly active end users established or located in the EU and more than 10 000 yearly active business users established in the EU for three consecutive years. The European Commission could in the future use delegated acts—a type of EU statutory instrument—“to specify the methodology for determining whether the quantitative thresholds […] are met, and to regularly adjust it to market and technological developments where necessary”.

59 Article 15(4) DMA. Similarly, gatekeepers will be required to inform the Commission of any acquisitions they make of businesses in the “digital sector” (which could, separately, be subject to EU merger rules).

60 The European Commission has dropped its proposal for a broader “New Competition Tool“, which would have created a new EU market investigation tool “aimed at addressing structural competition problems across markets” (including in particular in the digital economy).

61 Indeed, the Commission’s chosen approach as set out in the draft DMA has been controversial. When it consulted its independent Regulatory Scrutiny Board in November 2020, the “outcome was a negative opinion“ because the impact assessment accompanying the draft legislation “did not sufficiently justify the restriction of its scope to digital markets”, “the selection of platform services within the digital sector”, or “the concept of gatekeeper platforms”. This necessitated a “substantial rethinking” of the draft legislation.

62 An early draft of the Digital Markets Act leaked to Politico hinted at several provisions which are absent from the formal proposal published by the Commission in December 2020, notably with respect to interoperability.

63 Recognising the potential difficulties the proposals pose for the EU-US relationship, the European Commission recently called for a ‘reset’ with Washington following Joe Biden’s election as President which, among other things, will include discussions on “digital governance” and “a joint EU-US tech agenda”.

64 The Commission’s public consultation in June 2020, ahead of formal publication of the draft legislation in December last year, received 110 responses. Reflecting the potential international ramifications of the proposals, many of the consultation responses were submitted by American companies—including Apple, Facebook, and Google, as well as from trade associations representing the interests of sectors with concerns about online access to goods and content that have intellectual property protections, digital rights organisations and consumer protection bodies.

65 While EU law continues to apply in the UK to some extent under the Protocol on Ireland/Northern Ireland in the Withdrawal Agreement, this arrangement only covers EU rules relating to trade in goods and not trade in services.

66 Article DIGIT.16 of the TCA, within the chapter on digital trade, commits the UK and the EU to “exchange information on regulatory matters in the context of digital trade” including “the protection of consumers” and “any other matter relevant for the development of digital trade, including emerging technologies”. However, it is Government policy not to agree to meetings of any of the joint UK/EU bodies under the TCA until the EU has formally concluded the Agreement. At present, until at least 30 April 2021, it only applies provisionally pending the consent of the European Parliament.

67 The draft Digital Markets Act is aimed at the largest firms in the digital sector, although the primary targets are based in the US. As noted, the draft Digital Services Act would even require non-EU digital services providers to appoint a legal representative in one of the Member States, who would share full legal responsibility for compliance with the new online content moderation requirements.

68 A full comparative analysis of the EU and UK approaches is beyond the scope of this Report. However, by way of example, the EU’s draft Digital Markets Act has different criteria for “gatekeeper” status compared to what would be considered firms with “significant market power” by the Digital Markets Unit. The scope of the regulatory requirements applicable to such firms, and the remedies that could be imposed to diminish market power, are also different. With respect to the Digital Services Act, the there may be differences in the scope of companies covered (with the Government’s Bill expected to cover, for example, search engines and private messaging services, which the EU Digital Services Act does not).

69 Indeed, in the proposal for a Digital Services Act, the Commission is explicit about this: Indeed, the Commission proposal on online content moderation refers to the possibility for the EU to “act as a standard-setter for measures to combat illegal content online globally” because of the “interest of companies outside the EU to continue providing its services within the Digital Single Market” as a large economic bloc. It has also referred to “supporting Europe’s digital agenda” as a “priority for EU trade policy” by “ensur[ing] a leading position for the EU in digital trade and in the area of technology” and “lead[ing] the way in digital standards and regulatory approaches”. Similarly, in its recent Trade Policy Review, the Commission said it will “seek the rapid conclusion of an ambitious and comprehensive WTO agreement on digital trade”, with the EU’s negotiating position likely to be based substantially on the draft DSA and DMA as they develop.

70 See for more information: Anu Bradford, “The Brussels Effect” (Oxford University Press, 2020), in particular pp 142–145. The author notes that “whether the Brussels effect occurs therefore often comes down to the question of non-divisibility of the products and services across global users”, adding that digital companies often “streamline their global data management systems to reduce their compliance costs with multiple regulatory regimes”, but are also “able to, and find it in their interest to, introduce divisibility and limit their policy changes to a jurisdiction imposing the demand”.

71 The UK’s role in the EU policy process is naturally much reduced compared to when it was a Member State, reflecting the fact that any resulting legislation will not be directly applicable in the UK anymore.

72 For example, OFCOM is on the record as emphasising to the EU Commission the need for “institutional cooperation between regulatory authorities […] internationally” on online content moderation, arguing that “national/regional initiatives [should] not emerge in a vacuum, minimising unwarranted divergences in regulatory approach, mitigating the risk of forum-shopping and the creation of regulatory safe-havens, managing the regulatory burden on stakeholders, and facilitating regulatory cooperation for cross-border enforcement”.

73 The CMA told the Commission with respect to new regulatory requirements for gatekeepers in the digital economy that “it is desirable for there to be a coherent approach across jurisdictions to governing the way that gatekeeper platforms can act, so as to provide clarity for businesses, investors and consumers and ensure effective ex-ante control. […] The international nature of these ‘borderless markets’ means that it is essential for competition authorities to work with each other and with governments as we look to support innovation, whilst enabling fair competition and protecting consumer interests”.

74 The Government submitted Explanatory Memoranda setting out its position on both the Digital Services Act and Digital Markets Act, as a legacy of the EU scrutiny arrangements operated by Parliament prior to the end of the post-Brexit transition period, because the Commission proposals were published before 31 December 2020.

75 European Commission documents COM(20) 825 and COM(20) 842.




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